Property

Spanish construction rebuilds after market collapse

Property developer Olivier Crambade founded Therus Invest in Madrid in 2004 to build offices and retail space. For five years business went quite well, and Therus developed and sold more than €300m of properties. Then Spain’s economy imploded, taking property with it, and Mr Crambade spent six years tending to Dhamma Energy, a solar energy […]

Continue Reading

Currencies

Euro suffers worst month against the pound since financial crisis

Political risks are still all the rage in the currency markets. The euro has suffered its worst slump against the pound since 2009 in November, as investors hone in on a series of looming battles between eurosceptic populists and establishment parties at the ballot box. The single currency has shed 4.5 per cent against sterling […]

Continue Reading

Banks

RBS falls 2% after failing BoE stress test

Royal Bank of Scotland shares have slipped 2 per cent in early trading this morning, after the state-controlled lender emerged as the biggest loser in the Bank of England’s latest round of annual stress tests. The lender has now given regulators a plan to bulk up its capital levels by cutting costs and selling assets, […]

Continue Reading

Currencies

China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

Continue Reading

Banks

Carney: UK is ‘investment banker for Europe’

The governor of the Bank of England has repeated his calls for a “smooth and orderly” UK exit from the EU, saying that a transition out of the bloc will happen, it was just a case of “when and how”. Responding to the BoE’s latest bank stress tests, where lenders overall emerged with more resilient […]

Continue Reading

Categorized | Capital Markets, Currencies

Mario Draghi’s difficult juggling act


Posted on November 29, 2016

The calendar is not kind to the European Central Bank. A week on Thursday, its governing council will deliberate, just days after Italy’s vote on constitutional reform, and a week before the bank’s US counterpart holds a meeting which could move the world’s bond and currency markets.

Temporal pressure of another kind is also building, as the ECB buys €80bn of bonds each month in a programme that runs until March. Extending it could create a new problem, as there may not be enough German Bund’s available next year to keep the ECB’s spending on the eurozone member country’s debt in line with a carefully agreed formula.

So Mario Draghi, head of the bank, must somehow ensure stability following a referendum many expect the Italian government to lose, without unduly favouring that country’s sovereign bonds. He must try to keep borrowing costs suppressed across a continental economy where inflation is absent, while also keeping banks healthy and profitable so they lend to businesses and consumers.

The ECB must also stay credible to bond market investors and traders who were disappointed by the size of stimulus a year ago, while placating those within the institution who fret about the extraordinary measures it has taken already. All while anticipating any effect the Federal Reserve may have a week later.

A US interest rate rise is about as close to a sure thing as market prices get, but the message on how fast future increases will arrive, and how high they might go, could have dramatic implications. If accelerating US inflation is in focus, meaning higher bond yields lie ahead, a stronger dollar will help European exporters. Parity between the dollar and the euro might beckon. Yet if markets have got carried away with prospects for both inflation and a response from the Fed, the euro could soon reverse course.

So what can Mr Draghi do? An official forecast for headline inflation in 2019 to hit 2 per cent might help to remind investors that inflation will one day return.

Another option is to extend ECB bond purchases, but at the €60bn a month pace at which quantitative easing began. A taper presented as a tweak, it would at least buy that most precious commodity: more time.

dan.mccrum@ft.com